CRITTENDEN RESEARCH-NOVATO, CA., March 5, 2010
DEVELOPERS PAVE GROWTH PLANS
The Apartment Report ™
Expect players such as Garrison Developer Group of Florida (GDGFL) and affordable firm Boston Capital to fill the existing development void left behind by merchant builders and aim for the long-term. USAA Real Estate Company considers long holds as well when in the past it implemented a relative build-to-sell game plan. Also, Focus Development works on a new project in Baltimore. Apartment starts are at post-World War II levels due to the equity and debt famine in the market. Merchant developers historically have accounted for nearly 80% of new apartment starts, a practice that is non-existent for the foreseeable future. Word is merchant builder Trammell Crow started 22 projects in Houston and Dallas in the last 18 months and today there are zero near term projects.
Most of today’s merchant builders are not profitable despite relatively flat hard and soft costs, low land prices and substantial write-downs in heavy hit markets such as California and Florida. These builders are also unable to pass on escalated construction costs to buyers by selling projects at higher prices upon buildout. Those willing to gamble on build-to-sell deals will be squeezed on their profits or be forced to reduce sales prices by as much as 40% below value. Count on the lack of financing and increasedconstruction costs to also hinder near-term merchant projects, prompting more to step into asset management or restructure mode, move to the sidelines, or implement abstemious pipelines followed by long-term holds. It may be five years before merchant builders ramp up activity again when they can get more bang for their buck. The long-winded financing process also makes sense for long hold players to replace merchant builders.
GDGFL secures a $48M HUD loan to fund Phase I of a mixed-use property in Tampa, Fla., that will eventually house apartments, retail, office and a hotel at buildout. Phase I is stamped for The Preserve at Alafia, a 351-unit waterfront luxury complex, which will break ground this month and be completed within 18 months. A portion of the apartments will be ready for leasing 12 months thereafter. Unit mix is ones, twos and threes ranging from 900 s.f. to 1,400 s.f. Rents will average $1,000.
Phase II, Alafia Crossing, is expected to commence in May and wrap up by the end of January 2011, just as the first residents move in to the apartments. This phase will have north of 40,000 s.f. of retail space,20,000 s.f. of office space and 10,000 s.f. of dining. Leases for Alafia Crossing are about 55% committed. A full-service Holiday Inn with a Conference Center will be part of Phase III and will be developed by American Hotel Development Partners. Construction should start January 2011 with a 12-month buildout. In spite of the bitter market taste, Garrison President Rey Ortega is confident this project will be successful because of its strong location and because the market area only has 13,000 total units now when there is a need for 18,000 apartment units. The development has been in the works for at least three years.
GDGFL is no stranger to apartment development and over the years has been part of more than $500M in apartment buildings, condominiums, townhomes, shopping centers, office buildings and recreational projects. Ortega takes on projects throughout Florida, the South and Eastern U.S. Garrison does not consider itself a merchant builder and does not have plans to sell the Preserve at Alafia, although it will entertain offers and would divest at the right price. Ortega feels construction will not pick up until funding turns on again and that won’t be for two years or more.
Boston Capital is involved in 20 to 30 investments at any one time and 80 to 100 per year. Anticipatedhold on all investments is 15 years. Its holdings include more than 2,700 multifamily apartment properties in 49 states and the District of Columbia, totaling more than 166,500 apartments with a development cost in excess of $12B.
Boston Capital provides equity for the Tamarack Place Apartments, an 83-unit LIHTC apartment development in Seattle. The company holds a 99% interest. The complex is part of the second phase of the Rainier Vista redevelopment, a mixed-use, urban infill project of the Seattle Housing Authority, which serves as the general contractor and provides some soft financing. Look for 65,991 s.f. in 24 ones, 53 twos and six threes in a single four-story building that will cater to renters below 30% to 60% AMI. Units will range from 655 s.f. to 1,188 s.f. Total site acreage is almost 1.05 acres. Tamarack will emphasize on energy efficiencies, in line with Boston Capital’s goal to ramp up the sustainability of its portfolio and focus on future green multifamily projects. Specifically, the complex will include green elements such as water-conserving plumbing fixtures, Energy Star certified appliances, high-efficiency lighting fixtures,low VOC paints and adhesives and individual electric meters to encourage household conservation of energy. Construction is underway and will wrap up later this year and lease-up will start around September and end at the beginning 2011. Others involved in the development include Chase CommunityDevelopment Bank (construction financing) and Washington Community Reinvestment Association(permanent financing).
USAA Real Estate Company still considers ground up development at exceptional locations and attractive returns. Traditionally, USAA has been an equity partner on ground-up development but now sees a growing need for an institutional recapitalization partner. It targets failed condo deals and steps in as acapital partner to complete projects that are in mid-construction in a joint venture with a development partner. However, it definitely favors acquisitions at this time. USAA monitors the market for two projects in its pipeline before breaking ground to optimize unit delivery timing. Look for stabilization of supply and signs of reduction in concessions before plans move forward. It does not have capital targetingland acquisitions at this time.
USAA eyes the Banks in Cincinnati development that will include 280 residential units averaging 800 s.f. and 80,000 s.f. of retail development. Carter Real Estate & The Dawson Company serves as a JV partner on the four-acre development. Construction should commence this quarter with projected unit delivery by Q3. In the past, USAA’s strategy for multifamily projects is to build, stabilize and then sell however, now it is prepared to hold longer term to maximize value.
Focus Development allocates $30M on The Patterson mixed-use project in Baltimore. Tax credits will be used to transform the site into 120 to 150 apartment units and up to 4,000 s.f. of retail. The project is stillin design, and the unit size, mix and rental rates are all subject to change. Focus Director of OperationsRick Diehl looks at approximately 90 ones (740 s.f. average) and 40 twos (1,060 s.f. average) with rents from $1,200 to $1,600. The anticipated absorption rate in the market is 12 to 20 units/month. Focus Development intends to hold the property once complete. No timetable has been set for selling the completed asset. Anticipate groundbreaking this year with a 12-month buildout. Cho Benn Holback + Associates will serve as the architect.
